Regional Institutional Quality and Startup Activities in the United States

Abstract

The decision to start an entrepreneurial activity can largely depend upon the institutional settings in which an entrepreneur resides. Economic freedom is a widely measured index for institutional context and quality. Ample studies find a positive association between economic freedom and entrepreneurship; however, these studies have been limited to correlative relationships and have not determined a consistent set of relevant covariates. In this paper, startup density, provided by the Kauffman Index of Startup Activities, proxies startup entrepreneurship, while the Economic Freedom of North America (EFNA) index represents economic freedom. This paper provides causal insights into economic freedom and entrepreneurship in the US from 2005 to 2015 using a double-selection post-LASSO method and interactive fixed-effect models. We find that increases in labor market freedom are likely to cause significant increases in startup density of entrepreneurial activities. In contrast, increases in government and tax freedoms caused insignificant or weak decreases in startup density.

Keywords: economic freedom, entrepreneurship, model selection

JEL Classification: H70, H73, K20